Libya may have shed its pariah status and entered a new era of detente with
the West - but one thing has not changed over 40 years, says Damien
McElroy: the despotism of its leader

At dawn on September 1, 1969, Colonel Muammar Gaddafi launched his coup against the Libyan monarchy. With his curled hair and manly features, the 27-year-old soldier was putting himself forward as an African Che Guevara. Unlike Guevara, however, he was prepared for failure: as he read his first orders out over the radio, he kept his turquoise Volkswagen Beetle – registration number 23398 LB – nearby for a fast getaway.

The expected counter-coup, however, never came. King Idris remained in Istanbul, enjoying the pleasures of late summer on the Bosporus, and the members of the royal Cyrenaican guard sat tight in their barracks. Instead of sharing the fate of the Argentinian guerrilla, who was hunted down and executed by the Bolivian army, Gaddafi became internationally famous – or, more accurately, infamous, as the "Mad Dog" of the desert who so provoked Ronald Reagan.

The youthful revolutionary has gone through many incarnations over the past 40 years, yet he has lost none of his zeal, or his flamboyance. As he celebrates the establishment of his Islamic socialist republic today in typically excessive style, Gaddafi has become either a barmy uncle whose eccentricities are tolerated because of his vast fortune, or, to his critics, a defanged dictator who presides over north Africa's richest country yet keeps his people in desperate poverty.

Apart from Gaddafi's African brethren, other world leaders will be notable absentees at the lavish festivities in the capital, Tripoli: last week saw spokesmen from the Kremlin to the Elysée politely denying that their masters had any plans to attend. But nothing is likely to deter Libyans from the belief that the world is in their leader's thrall. The release of the Lockerbie bomber, Abdelbaset Ali Mohmed al Megrahi, from a Scottish prison just days before the anniversary has been trumpeted as crowning proof of Col Gaddafi's importance, and of his undiminished abilities as a manipulator. When they were handed over for trial, under international duress, the "brother leader" promised his people he would secure the return of Megrahi and fellow suspect al Amin Khalifa Fhimah (who was found not guilty). Now that the unrepentant mass murderer has returned home to die, the regime is victorious.

Yet the release of a frail old man is a curious trophy for despot who craves recognition as a universal leader. One of his first ventures was to imitate Chairman Mao by publishing the Green Book, a convoluted compendium of political philosophy which established a form of democracy without suffrage or parliament, in which people's committees administered the country. Like Saddam Hussein, Gaddafi also turned his hand to fiction, writing 15 novels – some with the involvement of Pierre Salinger, President Kennedy's speechwriter. However, the main similarity with the Iraqi dictator was the way in which Gaddafi constantly mixed vainglorious statesmanship with callous and brutal actions, using the wealth from his country's oil reserves to bankroll his schemes. That cash – estimated to have exceeded £1 trillion, with more untapped resources yet to be exploited – funded a rogue's directory of revolutionary movements from Palestine to the Philippines. Fishing trawlers carried Armalite rifles and Semtex explosives to the IRA. Libyan officials acted with murderous impunity at home and abroad: not least in the shooting of WPc Yvonne Fletcher by a member of staff from the Libyan embassy in 1984.

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At the height of its notoriety as a terrorist state, Libya was part of a prototype "Axis of Evil" alongside Syria and Iran. According to a Western intelligence source, "Iran conceived the attacks, Syria planned them and Libya carried them out." One such mission was a bomb attack in 1986 on a Berlin nightclub frequented by US soldiers. President Reagan responded by ordering American bombers based in Britain to target Tripoli. In an attack on Col Gaddafi's compound, his adopted daughter Hannah died. The dictator was enraged, and the destruction of Pan Am Flight 103 over Lockerbie on a dank December morning in 1988 – which killed 270 people – was said by some to be an act of revenge. Others thought it more likely that Iran and Syria shared responsibility, as they had in Berlin, since America had also shot down an Iranian jet over the Gulf a few months earlier.

Although Lockerbie was not the last dreadful deed that bore the colonel's fingerprints, he was sobered by Saddam's removal from power. The parallels between the two men were never exact, but they were close enough for Gaddafi to worry that America's crosshairs would soon turn to his north African stronghold. In 2003, an MI6 official reported the first stirrings of Libyan interest in detente and a succession of secret visits from Whitehall brokered a deal for Libya to come in from the cold. Gaddafi demanded that the head of the British military visit Tripoli; by December he had handed over the details of his secret nuclear weapons programme.

It was a deal that offered something for everyone. Libya ensured that it was off the list when Condoleezza Rice named six outposts of tyranny in which America sought regime change. Tony Blair's "Deal in the Desert" on his second visit to Libya in 2007 brought Britain lucrative contracts and confirmed Libya's rehabilitation.

But while his support of terrorism has diminished and reforms to the government are mooted, Gaddafi has not lost his quixotic flair. On a visit to Rome earlier this year, he inspected the honour guard dressed in a comic opera uniform, flanked by his Amazonian bodyguards. Roman commentators mocked the ensemble as a perfect mix of Mussolini and Michael Jackson.

And while Libya has become a magnet for foreign investors since the regime settled its differences with the West, few can doubt that it remains in the grip of one man's megalomania. The preparations for today's anniversary celebrations refute any suggestion that Libya is about to become an ordinary country. Hundreds of millions have been spent ripping up and rebuilding the long-neglected landscape of Tripoli. Thousands of palm trees have been planted along the seafront, roads have been resurfaced, dry sand verges have been relaid with grass and unsightly buildings concealed. A precious lake beside Tripoli's ancient walls has even been drained to provide a stage for performers flown in from around the world.

Huge banners praise the leader with lavish abandon. "Without you the impossible would not happen," is one slightly incomprehensible message. Yet even among the regime's acolytes, there is considerable dread over how things will go. "I know I have to go to be seen there, but it will be chaos," says one associate of the regime. "The officials can't organise a thing. Yes, there will be yachts and cars, but every delegation will be engaged in a free-for-all."

A decade ago, on the 30th anniversary of the coup, Tripoli was strung with coloured lights, banners and portraits of the colonel, some proclaiming his "pregnant radiation". But with only a few hours' notice given, the celebration was pushed back to a new date, September 9, to mark the anniversary of Col Gaddafi's unilateral proclamation of a United States of Africa in his home town of Sirte. Ever since, the Gaddafi family's Afriqiyah Airways has displayed the logo 9.9.99 on its planes.

And though Gaddafi is thought to be in good health, a discreet power struggle is under way as he ages. The regime's loyalists have clustered around his fourth son, Moatessem-Billah, the head of Liyba's intelligence operation. The old guard are said to be comfortable with his enforcement of the hard line against dissent.

The wild card is his second son, Saif al-Islam, an international gadfly turned dealmaker. It was Saif who prepared the way for Gaddafi to hand over the Lockerbie suspects and persuaded British officials to allow Megrahi's return. "The family respect each other, but from a distance," says their associate. "If they are both in London, they will not visit each other because [the other family members] do not want to see their brother drinking alcohol or enjoying girls."

Saif – whose name means "Sword of Islam" – has declared that Libya will be transformed into a democracy. Last year, after his father grew exasperated by his reformist statements, he retired from public life. But by accompanying Megrahi home he signalled that he was making a comeback. It was also a reward for months of work for Saif, who has become close to Lord Mandelson and is rumoured to be considering a billion-dollar investment in the ventures of Oleg Deripaska, the Russian tycoon and friend of the Business Secretary.

His friends are convinced that Libya will embrace democracy if Saif wins the power struggle with his brother. "I'm sure he means this," says one. "Saif looks up to Britain very much and likes the Westminster model of parliaments. I'm sure he will turn it over to a democracy – after a decade or so when he has made all his money."

But whichever son wins, it is hard to predict a career to rival their father, the self-declared "King of Kings, Imam of Imams". Or, to offer a more apt description of Gaddafi, "Survivor of Survivors".